Breaking up is never easy…a break clause lease disagreement

The High Court ruled in the case of Goldman Sachs International v Procession House Trustee Ltd and (2) Procession House Trustee2 Ltd that a tenant of office premises could break its lease five years early so long as it yielded up the premises with vacant possession and no rent arrears. There was no additional obligation on the tenant to have complied with the reinstatement clause in order to successfully exercise the break.

Background

The tenant had leased a London property from the defendant landlords for a term of 25 years for rent of just over £4 million a year. The lease was due to expire in September 2024 but the tenant sought to exercise a break clause in the lease which would allow it to leave the premises five years early, making the tenant a saving in excess of £20 million.

Issues

The landlord and tenant disagreed as to whether vacant possession and no rent arrears were the only conditions of the break clause, with the landlord asserting that compliance with the reinstatement clause (clause 11) was also a condition to exercise the break clause effectively.

The relevant clauses:

• Clause 23.1 set out that the break clause could be exercised after 20 years “subject to the Tenant being able to yield up the Premises with vacant possession as provided in clause 23.2”.
• Clause 23.2 stated “On the expiration of such notice, the Term shall cease and determine (and the Tenant shall yield up the Premises in accordance with clause 11 and with full vacant possession) but such determination shall be without prejudice to the respective rights of either party against the other in respect of any antecedent claim or breach of covenant.”
• Clause 11, entitled “Yielding up” set out the tenant’s reinstatement obligations, specifying that the premises should be restored to their original state in accordance with the Works Schedule, unless not required by the landlord.

The tenant maintained that the reference to clause 23.2 within clause 23.1 was purely to explain the parties’ obligations once the break had been successfully exercised. However, to be clear of its obligations and prior to attempting to break the lease, the tenant sought a determination as to the true construction of the break clause from the High Court.

Result

The High Court held in favour of the tenant, ruling that the more natural and ordinary reading of clause 23.1 was that the break clause was conditional upon the premises being yielded up with vacant possession and there are no rent arrears only; it was not a further condition that the tenant should comply with clause 11 to successfully break the lease. Furthermore, the requirements within clause 11 did not set out precisely what the tenant had to do and left scope for disagreement, so it could not be a suitable condition of the break clause. The Court considered clause 23.2 to be a mere reminder of the parties’ obligations if and once the break had been exercised.

Conclusion

This case is an important reminder to parties to ensure no ambiguity in the drafting of the conditions that must be complied with for the successful exercise of a break clause. Where there is any confusion as to the parties’ rights and/or obligations in this regard, early clarification should be sought from the courts where possible to avoid expensive and often protracted litigation after the event.

If you are considering the exercise of a break clause in your lease, it is important to take early legal advice, and it is strongly recommended that a solicitor is instructed to serve the break notice, given the often very high stakes involved in making sure that the break right is exercised correctly. Our property disputes team is extremely experienced and can handle these issues for you at Boyes Turner.